According to the latest U.S. Census Bureau survey, household incomes in San Francisco are indeed up. In 2006 the median household income in San Francisco was $65,497 (up 13.9% over 2005) with an average of $92,477 (up 10.9% over 2005). And in 2006, 9.2% of San Francisco households made over $200,000 (the rough minimum required to qualify for a $600,000 mortgage based upon conventional standards).

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It would be really interesting to take these averages and cross reference with San Francisco home ownership averages discussed about a month back and layer in that on average 10% of the US population moves annually and assume this applies to SF to see how many people are really actually looking to buy in SF and then compare this to MLS listings and Cii

I have to admit that I’m surprised that less than 10% of SF households make more than $200k/year.
the way people talk you’d think $200k/year is the poverty level.
That said, incomes going up is the MOST IMPORTANT thing for housing prices.
If anything can help bouy SF Real Estate, it’s increased wages.

I bet 95% of the 9.2% owns homes.
And buying a $600k place on $200k income? I would also be willing to bet that most people at that income level would buy substantially more expensive places, especially since they are probably young and know their income is going to increase dramatically over the next five years.

And buying a $600k place on $200k income? I would also be willing to bet that most people at that income level would buy substantially more expensive places, especially since they are probably young and know their income is going to increase dramatically over the next five years.
We (my SO and I) make just over 200K. Maybe I’m I’m cheap but after you max out 401Ks, allow for property taxes, HOAs, mortgage, travel, eating out (that is–having a life), etc, a 600K place is actually a bit of a stretch. Sure, we could probably buy something “substantially more expensive”, but why? I think a number of others in that income range feel the same way.

For San Francisco County, the percent change in population between April 1, 2000 to July 1, 2006:
-4.2%
Don’t forget the possibility that we’re not getting richer– we’re just losing more families off of the low end of the income distribution. Without seeing the distribution of incomes from both timepoints you can’t deduct much from either the median or the mean income.
This has similarities to the discussion about rising median housing prices in San Francisco.http://quickfacts.census.gov/qfd/states/06000.html

I’m in a just under 300K/year household and I’m definitely stretching to buy a 1.06MM place, at least by “conventional standards.”
Conventional standards are just that, “conventional.”
Since when has anything in any context whatsoever ever been “conventional” when it comes to San Francisco?
And in particular, the housing affordability rule of thumb.

Just to be clear, our hypothetical $600,000 mortgage was assuming an average purchase price of ~$750,000 with 20% ($150,000) down. What can we say, we tend to be conservative.
And while it’s true that borrowing habits in San Francisco have been anything but ‘conventional’ over the past few years, new (or rather old) lending standards are now challenging the ‘un-conventional’ habits of more than an isolated few.

“Just to be clear, our hypothetical $600,000 mortgage was assuming an average purchase price of ~$750,000 with 20% ($150,000) down. What can we say, we tend to be conservative.”
Aside from the 20% down payment, which is unlikely to occur in most cases, I’d say that’s a good guess-timation for SF. A home worth 3.75 times your gross annual income (isn’t the conventional rule of thumb 3 times?).
We’re at about 3.6 with a 10% DP, which I think is plenty tolerable.

“Don’t forget the possibility that we’re not getting richer– we’re just losing more families off of the low end of the income distribution….”
I think it’s pretty clear this is what’s occurring. The print edition of this morning’s Examiner contains a table which shows the relative change of income distribution in San Francisco – more high earners, fewer in the lower wage earning groups. One has to suspect that’s a reflection of out-migration due to housing costs, both for ownership and rental.

Funny, but if you look at those houses in the thread below this one (the ones that fell out of contract), they are all in the range of 700-800K. There isn’t a single $200K family I know who would want any one of them. They’ll just move out of the area before they’d buy something falling down like that.
So I don’t really care how many $200K households there are, they aren’t buying those pieces o’ crap. You all are delusional if you think people will stick around so that they can maybe someday afford a run down home. You’ve been drinking your own kool aid for way too long. SF’s declining population will absolutely accelerate if that’s the best anyone can dream for.
And those are the homes for which only the upper crust can now qualify, and only if they save $150K for a down payment. If they aren’t buying them, and no one else can qualify, I’d say that’s not a good sign.

i don’t agree with a lot of comments on this thread. I think the 3.6 x income house has not been common in SF for while. I think there are a lot of people who are paying 5-8x their income for homes
1st of all, I know several individuals and couples in SF who have bought houses in the 600-700K range and their salary or combined salaries are around the 100K level. These are not people currently in foreclosue, but may feel the hurt over the next year or so. These are also reasonable intelligent people who had at least a 10% down payment and good credit
2) there are plenty of people making less than 100K who bought homes over the past 3 years who put nothing down
3) i personally am sitting just above the 200K level and would never consider buying anything above 700K with my salary. There are better places to put my money and housing is too high.
4) i don’t think 95% of the people who make 200K or more own homes here. I would say the numbers is less than 75%. most of my friends who make over 200K do not own homes for the same reason i don’t
5) Personally, I would not spend more than 700K on a home, but the cheapest home I would consider buying in SF is currently over 1 million. Most under that are just not that nice. My rental is nice and i pay less than 2000 per month.

For what its worth, my wife and I make well in excess of $300K, and thats not including bonuses and stock options, and we do not own a home, nor do we think its a good “investment” at this point. I would agree with Spencer above, we both are in affluent professions and a good percentage of the people we know do not own either, so less than 75% rings true.
We also would not consider buying any of the above listed/mentioned “homes”. The stuff we have seen that we have liked are in the $1.5MM range and at this point we are not comfortable spending that much for a 2+ bedroom condo (Marina, Cow Hollow, Pacific Heights).
Our rental will do just fine for now, we are paying a little over $1,500. Why the hell would we want to buy?

Spencer/Scott:
What would you say you would pay if you were renting something your “rental” today? Also, what would be the asking price if your “rental” was for sale?
I am in Redwood City and trying to make a buy vs. rent decision.
Chuck

I almost don’t know a single person (work or friends) that doesn’t own a place, and I personally know no families that don’t own. Pretty much the only people I know who rent are single, twenty-somethings, or people who don’t plan on staying in town longer than a year or two.

Fascinating. What most aren’t mentioning is that there were many many people who bought affordably in 1997-2001, and then traded up in the 2004-2006 time period. Bought a SOMA loft in 2001 for $375K, which was comfortable at that time…our household income was about $175K at that time, before bonuses. My partner went on disability in 2003, but in 2005 we sold the loft, cashed out $200K after taxes and realtor commission, and used most of that as down on a completely remodeled SFR in Bernal. While I’m sure our house has lost 5-8% in value since then, we’re here for at least 7-10 years, so no worries. Current household income is still about $175, before bonus, due to loss of my partner’s income. Oh, and after taxes, our monthly housing cost including property taxes is approximately $3,100. That’s about what I would expect to pay in rent for a similar quality 3BR/2BA in this neighborhood. And that’s with a 30 year, 7 year fixed at 5.275%. So economically, it makes sense for us, and for our future. I don’t expect prices to begin recovering until 2009 mid year. But as long as employment and wages are rising in the city, don’t bet that the adjustment will be too drastic. 5% losses each year for three years, and then you’ll see a rebound in 2009.

wow,
i’m 31, an architect, have been here 6 years, make 54k /yr and on a work visa. im envious of all you people with your 200k and 300k incomes. what do y’all do? i’d honestly love to know.
if i use the 3x annual gross income= 162k is how much house i can buy. haha!!

Census numbers (2005) at http://search.yahoo.com/search?p=american+factfinder+2005+san+francisco
720k population, 322k households. With 9.2% above 200k, that is ~30k households that can afford the median price home based on standard downpayment and loan/income ratios. That is about 1/4 of the total number of owner occupied housing units in the city right now (122k),or about equal to the number of vacant units (~32k), or about the number of new condos coming online in the next 5 years :-).
That said, as incomes increase the standard loan/income ratios become less important. If I *really* want a house and I am making 1M a year (extreme), I have a lot more disposable income to use after paying for the cable TV and burger king.
Other interesting tidbits from that: average mortgage was $2500. Now someone have some fun and map relative affordability for me

“Spencer/Scott:
What would you say you would pay if you were renting something your “rental” today? Also, what would be the asking price if your “rental” was for sale?
I am in Redwood City and trying to make a buy vs. rent decision.
Chuck”
Posted by: Chuck at August 29, 2007 9:44 PM
Chuck,
I think my place would probably rent for about $2500 today as opposed to the 2000 I am paying. It is a large 2bdroom in Pac heights with parking and is jsut 1 blk off Fillmore.
Based on comparables, I think the place would sell for at least $1 million.
Therefore, i would be paying almost triple my rent to buy the same place i live in. i see no reason to buy. Plus, I am invested heavily in stock and am generally much more comfortable with the returns in stock.
I do plan to stay in SF, but will continue renting until the prices seem reasonable. A lot of my friends who bought in last 2 yrs really bought into the whole “if you don’t buy now, you will be priced out forever.” I think that is ridiculous.

a follow up to my census post above. One of the things I’ve always wondered is whether all these condos are being purchased by out of towners who fly in for the weekend once in a while. It appears that [less than] 3% of residents moved here from another state in 2005, and [less than] 1% from another country. Perhaps they don’t report in the census numbers, and show up as vacant units? (we can all be positive, right :-).

@poor boy: some of the anonymous people here are lying/exaggerating their incomes. It’s more common than lying about one’s age in a chat room (it’s been studied).
When reading this blog, it’s best to focus on verifiable facts/data, rather than “I know someone who makes 500k a year at google (not including options!!1!) and still shares a studio while riding the googletard bus every morning.”

@poor boy: some of the anonymous people here are lying/exaggerating their incomes. It’s more common than lying about one’s age in a chat room (it’s been studied).
True, people do lie anonymously, but if you work in silicon valley or SF and are a couple, a 200K household income is very achievable. Salaries for mid-level engineers are 90-130K, so double that and you’re looking at 200-300K as a midpoint. Add in things like options, ESPP, bonuses, etc., and it’s a pretty good chunk of change. Of course, even with that income it’s hard to buy anything decent.

Spencer –
What kind of equities are you liking right now and aren’t you concerned about volatility and contagion? I am heavily into equities and am in for the long haul but I sure would have a different position if I were planning on buying a place in the next year or two.

@ poor boy — I feel your pain! I bought my first home (in midwest) being single and on a work visa with annual income of $42K. You probably know that already but as a non-resident you must put 20% down in order for a bank to approve you which makes it even harder for a 1st time home-buyer.
Now I am married with combined income that will be right around 200K once I start my new job in SF. Buying a home is out of question — even the rents in San Francisco are higher than our current mortgage. Maybe I am spoiled by the low real estate prices in Minneapolis, but there’s no way I am going to take a standard of living cut when my SF job is roughly doubling my salary (BTW, I am a project manager).
I don’t believe that our inaction will “price us out forever” but even if it does, I am Ok with it. Enjoying life is more important to me than owning a property — and in this town the two goals are hard to combine.

Yesterday my dentist complained to me that after buying his house 20 years ago for $300,000 and having it recently appraised at $1,300,000 he just can’t afford a nice newer place in the city for his four person family. This was almost in the same breath that he mentioned unprompted that his son’s high school ran $30,000 a year. I would have punched him in the nose and called it even, but he had a sharp hook in my mouth.

Who are the people who make that “much” – I moved here in ’98 for a law firm job (the starting salary was $95K, it’s now $160K). Met my now-spouse, also a lawyer. Watched my friends marry business Schol grads or other lawyers or doctors or hard-core techies. In my limited social circle, most people are making at least $200K if not more and that accounts for a good chunk of families that now have someone staying at home to take care of the crop of kids that has come along. The remaining dual-income-professional families I know are doing very very well. We’ve got a few friends with family money, but a good chunk of my friends are hard working professionals. And almost everyone has now bought.

My partner and I have been here since 1980 and we’ve bought twice, in 1988 and 1995. I remember the falling prices of the early 90’s – yes it can happen here, we bought at the bottom. I also remember when affordability was low in the early 90’s and prices fell until affordability rose again. I think that is in the cards here.
Prices are too high relative to income. I think it would be useful to look at affordability indices for SF and calculate what percentage decrease is required for affordability to reach historic norms.
But there is also the increasing income inequality to think about. There are more people making big salaries but the gap between this group and people lower on the income scale is also growing larger.
It may be that our housing market will become bifurcated: prices on non-prime properties will fall a lot, prime properties will hold their value. The 600K shacks will fall the most. This would actually be good for the city.

dissent – I think all of your comments are dead on. It’s refreshing to hear from someone who has followed real estate through a full cycle rather than just the past 5 years. There are too many people who don’t remember 12% prime mortgages in 1984 – hence the “it only goes up” mentality of many.
I’ve done a lot of analysis based on income multiples, historical appreciation, etc. My guess is that a 15-20% correction puts this market back in balance. I think BernalDweller has it right – 5% losses per year for 3 years before things pick up. Just my opinion, though.

“We’ve got a few friends with family money, but a good chunk of my friends are hard working professionals. And almost everyone has now bought.”
In all seriousness, couldn’t this be a problem? If almost everyone making over $200K has now bought, who’s left to buy all the $700K fixers much less all the $1M+ new condos?

Spencer – What kind of equities are you liking right now and aren’t you concerned about volatility and contagion?
I have switched a lot of captial recently into HQH, some into high yielding money market, some into small cap biotechs (wave of acquisitions astarting), and the rest in index funds.
I’m diversified enough and my horizon is far enough to ride out volatility. i have a decent amount invested into money markets and am adding to that every month, so that i can let my long term investments ride out and have enough in the money markets to make a nice down payment once the housing market is down 20-25%% in Jan 09 (clearly an off the cuff prediction0

“In all seriousness, couldn’t this be a problem? If almost everyone making over $200K has now bought, who’s left to buy all the $700K fixers much less all the $1M+ new condos?”
IMHO, if your income is $200K, you probably shouldn’t be buying anything more than $700K, which is why i don’t own

dissent raises a good point about income inequality…
Even if the market begins to right itself, hasn’t the nature of the city been irrevocably changed?
Maybe things will get back to normal in 5 years, but in the meantime, I’m not sure I want my son growing up thinking that the world is made up of lawyers, MBAs, and homeless people.

Burble,
Couldn’t agree more and I don’t see things ever really changing or families returning. Any downturn will be temporary
Less families (whats the point unless you are rich now?), less young people will be able to move here and it will be more like Manhattan and more of a lifestyle city. Very rich people, some immigrants and the poor. Totally gone is the town my parents and grandparents grew up in.
It’s not right or wrong it just is the way it is. SF is a small city in a huge growing region.
But rather than lamenting the change and being nostalgic I hope our leaders (and neighborhood groups) accept this reality and embrace regionalism within the greater Bay Area. Other cities need to increase their densities, SF needs to reinforce its dominance as the regions downtown, public transit needs to be improved greatly to facilitate the movement of workers etc. etc.
For me it seems the East Bay is the place for moderate income people who want a diverse cool environment

“IMHO, if your income is $200K, you probably shouldn’t be buying anything more than $700K, which is why i don’t own”
Spencer, I think you over simplify things. I don’t think you can get a nice rental for $2k/month that would be equivalent to $1M condo. Rents are rising, you may have a rent controlled place, but that’s not something everyone can rely on.
I also think that the 3X income multiplier doesn’t make sense at the high earner bracket.
Let’s assume our 200K/year buyer could come up with 20% down payment. It’s not too hard to piss off this much of income without saving anything, but I thought we are discussing here savvy people in terms of managing their personal finance. That kind of income and renting for few years you should easily be able to save over $50K/year. In addition people in this income bracket usually get bonuses or stock options, etc..
let’s assume 6% loan + 1% property tax and 80% financing -> (6+1) * 0.8 => 5.6% anualy. Using 40% tax bracket (state + federal for someone making 200K), you get 5.6 X (1-40%) = 3.36 so let’s round it up to 3.5%.
This would put you at about $3K/month for $1M property, which is very manageable.
200K income should leave you with 110K-120K after taxes and 15.5K into your 401K, hence 9K-10K a month.
I’d argue that these people could afford even 4K monthly -> i.e. buying 1.3M-ish places.
I was obviously assuming IO loans, but even if you pay principle, you could just consider it as part of your savings.

“In all seriousness, couldn’t this be a problem? If almost everyone making over $200K has now bought, who’s left to buy all the $700K fixers much less all the $1M+ new condos?”
In my building there are a bunch of recent empty nesters who are tired of commuting from Lafayette, for example. Also, there are more than a few people from elsewhere in the country or world that own second or fourth homes. I’d say at least 30% of the units in my building are vacation homes, because they are all sold and very rarely occupied. Yeah, the old SF is disappearing by the minute, that is for sure…I am all for it.

In all seriousness, couldn’t this be a problem? If almost everyone making over $200K has now bought, who’s left to buy all the $700K fixers much less all the $1M+ new condos?
I’m not sure it’s a problem. Like I said, I socialize in a very narrow spectrum of San Francisco society. But people I know want to buy bigger places (more kids, in-laws start moving in, not having kids so they want to move closer to the “action”, etc.) or we’ve got friends who started working in NY or Chicago or LA who’ve now moved here and want to buy because let’s face it, renting a place for $2000 or $3500/month isn’t a bargain, especially if you are thinking long-term. Not to mention that there are law school, business school, and medical and dental school grads being minted every year – I’m about 9 years out of school. I look ahead and see people with a few more years experience making more money and below, I see the “kids” who are just starting out. And even the fixers in the right neighborhood are attractive to my narrow slice of SF Life. I would buy a 4 bedroom fixer in an instant if it were in the right neighborhood! The few acquaintances I have that fall outside of this spectrum bought a long time ago or are in renter purgatory – periodically getting evicted (OMI’s), living in your 30s with roommates and wondering how they’ll ever support a family, or paying too much to to be able to save anything for a down payment, etc.
But yeah – I have grand hopes for public schools. At least there my kids will see that not everyone is “just like them.”

I agree– I think SF will Manhattanize, and it will become a community of rich people and a playground for surrounding areas. I don’t happen to like it– I like a socioeconomically diverse city, with all the associated run-down art cafes, thrift stores, and third-run arthouse movie theatres that type of diversity entails– but I do think it’s inevitable. Poor people moving out is the first wave– next more rich families will move in from surrounding areas, because they realize that the new cleaned-up SF is almost as safe Hillsborough but more fun, and they can afford to send Junior to private scool. The rich transplants will drive up prices (eventually, it may take a few years) and more poor people will move out, and all the run-down cafes will become Starbucks outlets.
That’s when I’ll move to the East Bay. I give it 5-7 years. I hope to sell my 2-bed TIC (by then a condo) to some relocating yuppie and make a killing.

“We (my SO and I) make just over 200K. Maybe I’m I’m cheap but after you max out 401Ks, allow for property taxes, HOAs, mortgage, travel, eating out (that is–having a life), etc, a 600K place is actually a bit of a stretch. Sure, we could probably buy something “substantially more expensive”, but why? I think a number of others in that income range feel the same way.”
Agreed. My DH and I also make over $200K combined and we are seriously wondering if paying $600K for a dump is worth the hassle. We would at minimum double our monthly living expenses. Currently we have a 2 bedroom, 2 bath rental in Pac Heights with 2 garage spaces for a little over $2K monthly. I’m sure comparable housing would cost well over $1MM. Not to mention that we don’t have $150K+ lying around the house for a down payment. It’s pretty exasperating.

“We (my SO and I) make just over 200K. Maybe I’m I’m cheap but after you max out 401Ks, allow for property taxes, HOAs, mortgage, travel, eating out (that is–having a life), etc, a 600K place is actually a bit of a stretch…”
Don’t forget to add private school costs if you have kids. For many families, that is the straw that breaks the camel’s back, the final insult added to the injury of a huge mortgage. It costs so much to live here, and we can’t even expect to land a good public school.

I wouldn’t send my kids to a SF public High School. [Removed by Editor
It seems that some of the Elementary and Middle Schools are improved though. My uncle is making a go [of] it with his daughter. 10-15 years ago no way.
My grandmother and Aunt were both lunch ladies at SF public schools (odd I know) and they have seen some crazy stuff over the years.

“Someone” – Monthly mortgage payments on a $800K jumbo for a $1M purchase are running closer to $5K a month at 7%. Taxes will run $1,000 a month. That’s $6K a month. The tax deduction *might* bring it down to $4K ($5K*.6+$1K) assuming no loss of the standard deduction and no AMT, otherwise that tax savings is only on paper.
Good point with regard to rent control however. If Spencer is paying $2K a month for an equivalent place the math doesn’t work but even at market a $1M place in PacHeights is renting for less than $4K a month which means it’s all a bet on appreciation.

“Good point with regard to rent control however. If Spencer is paying $2K a month for an equivalent place the math doesn’t work but even at market a $1M place in PacHeights is renting for less than $4K a month which means it’s all a bet on appreciation.”
Honestly, I have a 2bdroom 2 bath 4th floor 1250Sq ft apartment with parking and laundry on Sacramento St 1 blk from fillmore st. I pay $2000 per month and I just rented the place in Apr 06, so i haven’t been here long so rent control shouldn’t matter that much.
Based on the neighborhood comparables, $800 +/sq ft., the place would see for $1Million +.
In reality i am paying 2000/ month with no HOA dues.
If I were buying, i would pay 6000/month + estimated 600 month HOA dues, for 6600 total + missed opportunity cost of $200,000 down payment.
I would be a sucker to buy.

Specncer – how the h*ll did you find that? I’m taking you to Vegas – you are one lucky *******.
We were paying $1950 a month for a place on Franklin (can you say busy street!) that we rented in 1998!!! It was just a little better than a dump – a laundry shared with 24 other people, no dishwasher, no parking, minimal heat, and a glorious 1970’s bathroom redo complete with gold speckled moldy tile. We looked into renting a 2 bedroom with parking before buying our place in ’03 and couldn’t find anything liveable in PacHeights for under $3000 a month (hence why we bought even if it meant switching hoods). My friends who just moved here from Chicago are paying $3800 a month for a 2 bed/2bath place one block off Fillmore.
Well, enjoy renting and stockpile your extra cash into some good investments.

I remember being in a three person roommate share in the Haight Ashbury in the mid ’90’s and our combined income was over $200,000.
But then we still fought like roommates about toilet paper and light bulbs.

Yes, I think $2500 for a two-bed 1 block off fillmore in Pac Heights is wishful thinking. I doubt Chuck will find anything in that range unless he goes to the Mission (my mouse- and cockroach-infested shithole in the Mission rented in June for $2250– $500 more than we rented it for in March ’06. People lined up for the open house!)
I live in the lower Haight and the 2-beds across the street were renting for $3000 last month– $3250 with parking. Renting any nice two-bed will be closer to $3000 in this market.

Spencer- how on earth did you pull that off? A review of Craigslist shows that ~$3000 for a 2BR 2BA in Pac Heights will only get you something that is not really in Pac Heights. You can hardly rent any 2BR apt. in the city with parking in a decent neighborhood for less than $2400 or so. Does your landlord know anything about the “rental market”?

Does the term “household” apply to roommate situations as well? If 4 just out of college friends lived in a flat and made 50k each, is that a 200k household? If so, that changed my opinion of how many people are making the big bucks, I know a lot of situations like that.

Spencer- how on earth did you pull that off? A review of Craigslist shows that ~$3000 for a 2BR 2BA in Pac Heights will only get you something that is not really in Pac Heights. You can hardly rent any 2BR apt. in the city with parking in a decent neighborhood for less than $2400 or so. Does your landlord know anything about the “rental market”?
I got it in apr 06 and am now covered under rent control. I guess rents have appreciated quite a bit in the past 17 months.

AC – $5K/month, your estimated rent, is equivalent to the interest only payments on a $1M condo with 20% down. You live in a building filled with $2M condos right? That’s called an arbitrage opportunity. Have you thought about talking with a financial advisor? Without above average price appreciation it sounds like renting in your building would make more financial sense.

hey poor boy @ 11:09– hang in there. i’m an architect in my mid thirties and make a tad shy of 100k. yes, we dont have stock options or corporate perks but im ok with that. i own since 06 with my partner and we make 170 k combined.
you will get your residency and realize your earning potential in a few years. trust me. and the house will follow.

I have to agree with others. When I made $200k, there is no way I could COMFORTABLY swing a million dollar house. After FICA, Federal/State taxes, disability insurance, dental/medical withholdings, my checks were right around $4400 every 2 weeks if I recall correctly.
Yes that was about $8800/month. But if you try to buy a million dollar house and live in CA you will likely hit the AMT (I did every year due to California’s high state tax and also due to exemptions for dependents and also due to high mortgage interest deductions). thus, your mortgage interest may NOT be deductible (or very little of it is deductible).
A $1 Million mortgage at 7.5% will run you $6992.15 for Principal/interest, plus $10,000/year (or $833.33/month) plus insurance. That’s at least $7800/month (PLUS insurance). and possibly much of it not deductible due to AMT.
Even at 6.5% (historically low Jumbo rates) a $1M mortgage runs you $6320 plus $833 or $7153/month (plus insurance)
who wants to have a high income and yet be stressed for money and live check to check? Plus, I’d hardly call having only a 401k sufficient for retirement! My god!
And there is no reason to do an Interest only loan (unless you pay it off as though it is a full amortisation loan). that is simply renting from the bank.

Check with your tax man, but I know that the AMT hasn’t erased all of our mortgage interest deduction. I think our added liability thanks to the AMT was about $2K a year, but our federal tax bill has dropped dramatically since buying our place.

“I don’t think you can get a nice rental for $2k/month that would be equivalent to $1M condo. Rents are rising, you may have a rent controlled place, but that’s not something everyone can rely on.”
Just to add to the other responses, my partner and I just got a two bedroom flat on Diamond Street in the Castro, with a back deck that has a view of Sutro/Twin Peaks, a garden, and a shared hot tub (my landlord lives it the flat above) that I would guess is about 1200 – 1500 sq ft and we only pay $2400 a month in rent. It would need some remodeling in the kitchen, and there’s not much storage, but it has all-new high-end appliances and we’re ecstatically happy with it at $2400 a month. Buying this space (assuming it wasn’t a TIC) would probably cost a good $750,00, esp. when you look at the other places in the neighborhood for comps. There are some excellent rental deals out there, but you have to dig for them – this is from MetroRents, btw.

“Don’t forget to add private school costs if you have kids. For many families, that is the straw that breaks the camel’s back, the final insult added to the injury of a huge mortgage. It costs so much to live here, and we can’t even expect to land a good public school.”
Tuition at most SF private schools starts at $20,000/year excluding fees, lunches, after-school care from 3:00 on, etc. When you add in the extra costs of summer care, music lessons, little league uniforms, obligatory school fundraising, and so on, it costs about $35,000+ year. Per child.

My $1M house has an $800K mortgage and I was using IO loan because I think paying the principle should be an equivalent of savings and shouldn’t be considered spending.
“And there is no reason to do an Interest only loan (unless you pay it off as though it is a full amortisation loan). that is simply renting from the bank.”
That’s just dead wrong, the whole point is to make money on the appreciation and use the leverage.
As far as I know no one questions the long term (5-10 years) apreciation of real estate. So even if you get only 2% a year, with 20% down you get 10% on your investment.
Surely buying at the peak will set you back and if you have fear of commitment don’t buy.http://bankrate.com/brm/rate/mtg_ratehome.asp?params=800000,CA,8&points=1&product=391&sort=99&pType=i&refi=0&pct=0&svyList=
Shows that you could get such loan for $4K/month
I did forget about HOA (I live in a SFH), but this could be mitiggated by buying in du/triplex, where the overhead is much lower

“So even if you get only 2% a year, with 20% down you get 10% on your investment.”
you neglect financing charges which are significant.
The APRs on those loans in your link are 6.5 to 6.8%.
on an 800k loan that amounts to nearly $50,000/year (minus taxes back due to mortgage interest deduction)
In order to come out ahead, one must do an IO loan and invest the amount of money procured by not paying down the mortgage and get an after-tax return greater than that of the risk free return that occurs by paying down the mortgage.
In this case, you’d need to return better than 6.8% after tax.
doable, but not without risk.
leverage works both ways of course as well. (which many people are finding out).
going forward, prospective buyers considering levering their house and investing the difference need to realize the very real possibility that their home value goes down concommitant with poor investment returns (as would happen if there were a recession).
so long as they have enough liquid cash in the bank to cover the mortgage in case of a need to sell, they’ll be fine. But there can be significant stress with this.
Your suggestion is fantastic as long as
-housing continues to go up
-investments go up.
it could be economically fatal if
-housing depreciates
-investments lose money

oh,
and MANY people question whether or not there will be real (as opposed to nominal) housing appreciation in the next 5 years.
interesting that your scenario says “So even if you get only 2% a year”
what if you get -5%?

As somebody near 50 years old who has lived in the city for 30 years, reading this thread is rather disturbing to me. People who hold jobs such as teaching, or stocking shelves, should consider getting out of San Francisco because “the city is changing”?! I guess to me this is the death of what was a rather unique place and the start of the push to make this city more like any other city. We who make more than 150k a year could instead feel a little empathy and demand that this city allow and provide more housing alternatives beyond BMR’s and follow examples of areas that seem to be becoming more progressive like Chicago. I guess it is time for “progressive” types like myself to consider Portland, Chicago or other cities, for I am not interested in living in a city full of “professionals” and would rather experience a real “urban” experience that included people who make less money than myself. I guess this “new cleaned up San Francisco” (as was mentioned above) will be attractive to some, but very undesirable to me.

“that said, I did find the tax advantages of owning my home much decreased due to the AMT.”
Wrong. AMT tax rate is 26%, then 28%. Because of the lose of extemptions when your income increase, the effective rate is 1/4 higher, so 33%, then 35%.
Up to 1M, the tax deduction on mortgage interest is 42%, then 44% (including 9% state tax).
Yes, you lose property tax deduction. However, the tax deduction is more beneficial than if you are in 15% or 25% regular income tax bracket.
Run TaxCut or TurboTax and calculate it out.

We who make more than 150k a year could instead feel a little empathy and demand that this city allow and provide more housing alternatives beyond BMRs and follow examples of areas that seem to be becoming more progressive like Chicago.
From my perspective the problem with the housing programs that exist is that are poorly designed and run inefficiently by our hack officials. SF city government is bloated by any measure (LA has 5 supervisors, for example). I’d be all for supporting more affordable housing, but not with the way the city is run.

I’ve found the mayor’s office of housing to be fairly responsive when I bought a unit that was part of the city second loan program (which I did not use but still needed to get them to release their right of substitution).
Also it is always a bad idea to try to use LA county as an example or comparison to SF. For example your statement that LA has 5 supervisors ignores the fact that LA also has a city council that consists of 15 members, plus there are probably hundreds of additional city council members for all the other cities that make up LA County. So just implying that since we have 11 supervisors compared to LA County’s 5 our government is bloated is misleading.

In ref to the comment above on SF public high schools, I can only say, I hope ours works out. My son just started at School of the Arts. Admission is by audition and it’s very competitive. He has so many friends going there. The mornings are academics and the afternoons are intensive art training. Test scores are quite good. So far he likes it A LOT. Of course there is also Lowell, the academic public high school – very high test scores, many strong academic programs (e.g. architecture).
In my experience where the SF Public school system really fails is middle school, we took our son out and sent him to private.
My advice is to prepare yourselves for 2-3 years of private. But you really don’t need to do all 12 that way.

Here is my take on the “rent vs buy” debate. It comes down to two questions: 1) do you want San Francisco to be your permanent home? and 2) can you afford to buy a place that you’d really want to live in? If you answer ‘yes’ to both questions, then it is time to buy. All other considerations are, at best, secondary and, at worst, misleading. For one, the notion of trying to time your home purchase to a felicitous moment in the market, while great if it happens, is for most a fool’s errand.
If you want to spend your life in SF, you need to buy a home eventually, but it should be a place you want to live. Presuming that you’ll be able to rent forever (and be happy doing so) is risky. But buying a place where you do not want to live for the sake of home ownership alone risks too much also.
This approach worked for me. I rented here for 12 years in a fine rent-control apartment. After about 10 years, I had concluded that, yes, SF was going to be my home for life. When I had saved enough to afford a simple place where I’d be comfortable living, I bought. I’ve now owned for 5 years. I’d recommend this approach to anyone.

“It comes down to two questions: 1) do you want San Francisco to be your permanent home? and 2) can you afford to buy a place that you’d really want to live in?…If you want to spend your life in SF, you need to buy a home eventually”
1) Yes, but… 2) Houses I want to live in have been going for 1.1-1.2M. Let’s just say I could snag one just over 1M (because some seller will recognize that they should take the earlier/lesser hit now :-). Assume an $800,000 loan, %7.875 30-year interest rate. Even if you could readily pay the mortgage for the next 10-15 years, who wants to be beholden to a $6,500+ monthly nut for the next 30 years? I’m guessing that a lot of people in my position will 1) stay renters, 2) consider the $800K fixer-upper in a dicey corner of the inner mission, or 3) buy now and cash out/move out upon retirement. This is where I’m leaning but don’t know how that pans out in the rent vs. buy risk/benefit picture.
– a 10-year renter chomping at the bit

2) consider the $800K fixer-upper in a dicey corner of the inner mission
Meleutic…a fixer-upper in a dicey spot in the Mission should be priced at $500-600, not $800. Just sayin’. And it will be 10% lower next summer. Hang in there! Also…be willing to compromise on your first purchase. No one gets exactly what they want on a first home.